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On April 17, 2018, the U.S. District Court for the District of Colorado found that, while the damages that an environmental consultant must pay its customer to complete a contracted project may often be covered under a professional liability policy, the policy issued by BatesCarey client, Rockhill Insurance Company, had a faulty workmanship exclusion that clearly precluded coverage for approximately $900,000 in arbitration damages awarded against Rockhill’s insured. The court further ruled that the lack of evidence that the insured’s business losses were caused by Rockhill’s failure to settle also entitled Rockhill to summary judgement on the insured’s alleged $4 million bad faith claim.

The dispute began in August 2012 when Rockhill’s insured, CFI Global Fisheries Management (CFI) entered a contract with Heirloom I, LLC for CFI to research, design and implement a fisheries enhancement project on the Weminuche Creek in Colorado. When it became clear that CFI’s design and build work was an utter failure, Heirloom hired other companies to conduct the proper design and fishery construction that CFI could not.

Heirloom then filed an arbitration proceeding against CFI, demanding either the return of $834,945 that had been paid to CFI, or the costs to repair and replace CFI’s design and build work. The underlying arbitration panel ultimately awarded Heirloom $629,671 in recovery of invoices paid by Heirloom for the new contractors, as well as approximately $250,000 in recovery of Heirloom’s attorney’s fees.

Rockhill had defended CFI against Heirloom’s claims in the underlying arbitration. However, prior to the entry of the Interim and Final Arbitration Awards, Rockhill filed a declaratory judgment action naming both CFI and the underlying claimant, Heirloom as defendants. Rockhill sought a ruling that the costs CFI was being asked to pay for Heirloom’s repair and replacement of CFI’s contractual undertakings were not covered under the Rockhill professional liability coverage for various reasons, including but not limited to the Faulty Workmanship exclusion, which precluded coverage for claims arising out of any cost or expense to “inspect, repair, replace, adjust, remove or dispose of ‘your work’.”

The court then found that the damages recovered by Heirloom likely constitute covered “damages” within the Rockhill insuring agreement, and that such damages do indeed arise from a “professional services incident” within the insuring agreement. In so ruling, the court rejected Rockhill’s argument that a “professional services incident” can only apply to third party injury or damage, and “not the economic costs of completing contractual obligations.”

With the loss falling within the Rockhill insuring agreement, the court then turned to the application of the faulty workmanship exclusion. Heirloom and CFI had argued that the exclusion only applies to claims for construction work, and not claims for negligent design work such as the ones that were arbitrated. Ultimately, the court concluded that the definition of “your work” in the Rockhill policy was unambiguous and that “based on a purely natural reading of the definition, therefore, it should include design work.” However, finding that both design and construction work could be excluded under the policy “collides with the generally understood purpose of professional liability policies,” the court wrote.

In resolving the tension of a professional liability policy that excluded coverage for damages arising from such construction and design services, the court commented that “ordinarily, the damages awarded to Heirloom in the arbitration should be covered by a professional liability policy. However, the court then explained that “irrespective of the ordinary purpose of professional liability policies,” the intention of the parties in this case “was to exclude damages arising from the replacement or repair of any work performed by CFI.” The court noted that the professional liability coverage is not illusory because the policy would still cover claims brought by third parties for damage to their property caused by CFI’s professional negligence.

Given that the damages at issue in the underlying arbitration were not covered by Rockhill, the court went on to find that approximately $250,000 in attorneys fees that had been awarded to Heirloom are not covered “claim expenses” under the policy.

The court then turned its attention to whether claims CFI had brought against Rockhill for bad faith failure to settle could survive summary judgment. CFI had argued that Rockhill’s alleged bad faith claims handling had “destroyed” CFI’s business. The Court found that, in this case, CFI had presented no evidence of its business income and valuation, and the court could not find that “any lost income or value was caused by Rockhill’s failure to settle.” The court thereby entered summary judgment against CFI on its bad faith claim.